Real wages in the business cycle: an unresolved conflict between theory and facts in mainstream macroeconomics

The focus of this paper is the recurring tension between mainstream macroeconomics and observed facts in connection with the difficult task of providing explanations of the business cycle consistent both with the traditional theory of income distribution and with the empirical evidence concerning the co-movements of real wages and employment over the cycle. The attempts to reconcile facts and theory have led to the continuous introduction of specific and arguably ad hoc hypotheses, in contrast with the search for greater theoretical rigour claimed by the various streams of macroeconomic modelling subsequent to the neo-classical synthesis. In addition, the specific assumptions introduced in the models, or their implications, are in turn often contradicted or, at best, not confirmed by subsequent empirical research. It is suggested in the conclusions that the difficulty of keeping together in a simple and consistent framework theory and facts reflects the flawed theoretical foundations of mainstream theory.